Question

Reba Dixon is a fifth-grade school teacher who earned a salary of $38,500 in 2018. She is 45 years old and has been divorced for four years. She receives $1,280 of alimony payments each month from her former husband (divorced in 2016). Reba also rents out a small apartment building. This year Reba received $50,300 of rental payments from tenants and she incurred $19,617 of expenses associated with the rental.

Reba and her daughter Heather (20 years old at the end of the year) moved to Georgia in January of this year. Reba provides more than one-half of Heather’s support. They had been living in Colorado for the past 15 years, but ever since her divorce, Reba has been wanting to move back to Georgia to be closer to her family. Luckily, last December, a teaching position opened up and Reba and Heather decided to make the move. Reba paid a moving company $2,170 to move their personal belongings, and she and Heather spent two days driving the 1,458 miles to Georgia.

Reba rented a home in Georgia. Heather decided to continue living at home with her mom, but she started attending school full-time in January at a nearby university. She was awarded a $3,160 partial tuition scholarship this year, and Reba helped out by paying the remaining $500 tuition cost. If possible, Reba thought it would be best to claim the education credit for these expenses.

Reba wasn't sure if she would have enough items to help her benefit from itemizing on her tax return. However, she kept track of several expenses this year that she thought might qualify if she was able to itemize. Reba paid $5,960 in state income taxes and $12,660 in charitable contributions during the year. She also paid the following medical-related expenses for herself and Heather:

Insurance premiums	$	5,955
Medical care expenses	$	1,260
Prescription medicine	$	510
Nonprescription medicine	$	260
New contact lenses for Heather	$	360

Shortly after the move, Reba got distracted while driving and she ran into a street sign. The accident caused $1,060 in damage to the car and gave her whiplash. Because the repairs were less than her insurance deductible, she paid the entire cost of the repairs. Reba wasn’t able to work for two months after the accident. Fortunately, she received $2,160 from her disability insurance. Her employer, the Central Georgia School District, paid 60% of the premiums on the policy as a nontaxable fringe benefit and Reba paid the remaining 40% portion.

A few years ago, Reba acquired several investments with her portion of the divorce settlement. This year she reported the following income from her investments: $2,360 of interest income from corporate bonds and $1,660 interest income from the City of Denver municipal bonds. Overall, Reba’s stock portfolio appreciated by $12,160 but she did not sell any of her stocks.

Heather reported $6,520 of interest income from corporate bonds she received as gifts from her father over the last several years. This was Heather’s only source of income for the year.

Reba had $10,000 of federal income taxes withheld by her employer. Heather made $1,000 of estimated tax payments during the year. Reba did not make any estimated payments. Reba had qualifying insurance for purposes of the Affordable Care Act (ACA).

a. Determine Reba’s federal income tax refund or taxes payable for the current year. Use Tax Rate Schedule for reference. (Round your intermediate computations and final answers to the nearest whole dollar amount. Leave no answer blank. Enter zero if applicable.)

    

Gross Income:

Salary

Alimony received

Rental receipts

Disability insurance payments

Interest income from corporate bonds

Interest income from municipal bonds

(1)Gross income

Deductions for AGI:

Expenses for rental property

(2)Total for AGI deductions

(3)AGI

From AGI deductions:

Medical expenses

State income taxes

Charitable contributions

(4)Total itemized deductions

(5)Standard deduction

(6)Greater/Lesser of itemizied deduction or standard deduction

(7)Taxable income

(8)Tax on taxable income

(9)Credits

(10)Tax prepayments

B. Is Reba allowed to file as a head of household or single?

C. Determine the amount of FICA taxes Reba was required to pay on her salary. (Round your final answer to the nearest whole dollar amount.)

D. Determine Heather’s federal income taxes due or payable. Use Tax Rate Schedule, Dividends and Capital Gains Tax, Estates and Trusts for reference. (Round your intermediate computations and final answer to the nearest whole dollar amount.)

Answer 1

Part A

	Description	Amount
	Gross income:
	Salary	38500
	Alimony received (1280*12)	15360
	Rental receipts	50300
	Gift from mother	0
	Disability insurance payments (2160*60%)	1296
	Interest income from corporate bonds	2360
	Interest income from municipal bonds	0
1.	Gross income	107816
	Deductions for AGI:
	Expenses for rental property	19617
	Moving expenses (2170+(1458*0.18))	2432
2.	Total for AGI deductions	22049
3.	AGI	85767
	From AGI deductions:
	Medical expenses ((5955+1260+510+360)-(10%*85767))	0
	State income taxes	5960
	Charitable contributions	12660
	Casualty loss deduction
4.	Total itemized deductions	18620
5.	Standard deduction	18000 (Head of household status)
6.	Greater of itemized deductions or standard deduction	18620
7.	Taxable income	67147
8.	Tax on taxable income	9320 (5944+(22%*(67147-51800))) (using tax rate schedule 2018 for head of household)
9.	Credits	1000 (as heather is Reba’s qualified dependent)
10.	Tax prepayments	10000
	Tax refund	1680

Part B

Head of household.

To determine the filling status of Reba, it is first require to determine if Heather can be claimed as her dependent. And for that four tests need to be undertaken: relationship, age, residence and support. Heather is Reba’s daughter and thus qualifies relationship test. She is under the age of 24 and full time student and thus qualifies age test too. Moreover, she live with Reba for the entire year and does not provide more than half of her own support. In this way, she qualifies both residence and support tests also. Thus, she can be claimed as Reba’s dependent. As Reba is single and has dependent for the tax year, she can file as head of household.

Part C

Salary amount < social security wage base limit for 2018. Therefore, $38500 is subject to FICA Taxes. FICA taxes = $38500*7.65% = $2945

Part D

Description	Amount	Explanation
(1) Scholarship	0	Used for tuition so all excluded from income
(2) Interest income	6520
(3) Gross income and AGI:	6520	(1) + (2) no deductions for AGI
(4) Standard deduction	1050	Greater of (1) $1,050 and (2) 350 + 0earned income
(5) Taxable income	5470	(3) − (4)
(6) Heather’s tax liability	809	(6520-2100)=4420 (255+(24%*(4420-2550)) = 703.80 (5470-4420)*10% = 105 703.80+105 = 808.80 = 809
(7) Tax prepayments	1000
Tax (refund)	(191)	(6)-(7)

Dear Student,

If any doubts then feel free to ask.